How Putin Forged a Pipeline Deal That Derailed

SOFIA, Bulgaria — Barely two weeks after President Vladimir V. Putin annexed Crimea on one side of the Black Sea, he won a different prize on the other side. In Bulgaria’s Parliament, lawmakers gave initial passage to a bill clearing the way for a mammoth gas pipeline from Russia.

The pipeline, known as South Stream, was Mr. Putin’s most important European project, a tool of economic and geopolitical power critical to twin goals: keeping Europe hooked on Russian gas, and further entrenching Russian influence in fragile former Soviet satellite states as part of a broader effort to undermine European unity.

The bill that Parliament took up on April 4 was arcane. But it swept aside a host of European regulations — rules that Mr. Putin did not want to abide by — for a pipeline that would deliver gas throughout southern Europe.

It was a dream bill for Mr. Putin, and with reason. While Bulgaria’s Energy Ministry ostensibly wrote the legislation, documents reveal the hidden hand of the Kremlin: Not only did much of the language come from a subsidiary of Russia’s state-owned energy giant, Gazprom, but Mr. Putin’s energy minister was directly involved.

“If this happens in the U.S., the whole government would resign,” said Martin Dimitrov, a minister of Parliament from Bulgaria’s Reformist Bloc. “Not in Bulgaria, apparently.”

For years, Mr. Putin bullied and cajoled Bulgaria, one of the European Union’s weakest nations, into doing Russia’s bidding on South Stream. And he seemed poised to succeed, but for one fundamental miscalculation: He underestimated the West’s response to his aggression in Ukraine. Faced with punishing sanctions, a petro-economy pushed to the brink by plunging oil prices and the wildly gyrating value of the ruble, Mr. Putin this month halted the project.

But if the story of South Stream shows how larger geopolitical concerns can, at least temporarily, limit Mr. Putin’s ability to use his energy riches as a foreign-policy tool, it is also a case study of how he has operated in Europe, and will probably continue to do so.

He has won influence abroad by wielding the tools of crony capitalism that have made him so powerful at home. After a secret meeting between Bulgaria’s prime minister and the head of Gazprom, pipeline contracts were given to a company controlled by a member of Mr. Putin’s inner circle and politically connected Bulgarian companies.

In Russia, Mr. Putin has at times used Russia’s state-owned banks for his own ends; they helped underwrite the Sochi Olympics, for instance. In Bulgaria, a subsidiary of one of those banks, VTB, showered the country with politically strategic investments as Mr. Putin pushed the government to move forward on South Stream.

As elsewhere in Europe, Mr. Putin courted Bulgaria’s pro-Russian far right party, which promoted Russian interests by helping to beat back plans to explore for Bulgarian shale gas. Seeking to nail down support for South Stream, a member of the Russian Parliament, whose card identified him as a special emissary of Mr. Putin, even offered what one former Energy Ministry official understood to be a tacit bribe.

“It’s not just South Stream, and it’s not just Bulgaria,” said the Bulgarian official, Bojan Stoyanov, who was deputy energy minister in 2013. “The Russians are promoting behavior where people are willing to dig the hole of a volcano in the middle of their country and not worry where the lava goes as long as they get paid.”

Putin’s Favorite Musicians

Vladimir Putin had a problem.

By 2011, his plan to build South Stream, estimated to cost more than $40 billion and four years in the making, had hit a stumbling block in Bulgaria, where the pipeline would make landfall after traversing the bed of the Black Sea. Geological surveys suggested that Bulgaria could be sitting atop an underground ocean of natural gas, enough to be self-sufficient for years, enough to eclipse the advantages of South Stream.

Bulgaria, once a staunch Soviet ally, and Russia share similarities in language, religion and culture, and Bulgaria still celebrates as a national holiday its 1878 liberation from the Ottoman Empire by the troops of the czar. Bulgarian leaders supported South Stream, declaring that the pipeline would provide not just transit fees but energy security: The country receives 90 percent of its gas from Russia, along a route through Ukraine that has left it vulnerable to periodic pricing disputes between Moscow and Kiev. In the winter of 2009, Bulgarians were left shivering for two weeks when Russia shut off the gas to teach Ukraine a lesson.

But in the middle of 2011, Bulgaria’s prime minister, Boiko Borisov, also granted Chevron a permit to explore for shale gas. Almost immediately, a well-organized campaign emerged to kill shale exploration before it began, fueled in part by loyalists for Ataka, one of several far-right parties that Mr. Putin has cultivated in Europe. Parties like Jobbik in Hungary and the Northern League in Italy view Mr. Putin as a bulwark against a tide of Western liberalism. But the appeal is more than ideological. In France, the leader of the far-right National Front, Marine Le Pen, recently acknowledged that her party had received a loan for 9 million euros, or about $11 million, from a Kremlin-linked bank.

In Bulgaria, Volen Siderov, the chairman of Ataka, said his party received no direct funds from Moscow.

“I’ll ask her how she managed to do it,” he joked of Ms. Le Pen.

Still, Mr. Siderov has undeniably close ties to the Kremlin. He kicked off his most recent political campaign in Moscow, where he was receiving the Fatherland Star medal for promoting closer relations between Russia and Bulgaria. When he needed entertainment for a rally this fall, he landed singers described in Ataka promotional literature as “Putin’s favorite musicians”: Oleg Gazmanov, an aging Russian pop singer, and Iosif Kobzon, a lawmaker and singer who recently performed in Donetsk, a Russian separatist-held stronghold in eastern Ukraine, accompanied by the orchestra of Mr. Putin’s Interior Ministry.

The anti-fracking movement became so broad that in January 2012, Parliament banned not only the extraction of shale gas, but even exploration that would quantify the country’s reserves. Environmentalists praised the vote, but many Western officials were suspicious.

In Brussels, Anders Fogh Rasmussen, secretary general of NATO, later accused the Russian government of using “sophisticated information and disinformation operations” to help derail shale gas exploration in Bulgaria and other countries.

With the death of shale gas, South Stream’s rationale was stronger than ever, especially as the Borisov government weakened. Mr. Borisov had signed preliminary pipeline agreements, even once presenting a puppy to Mr. Putin as a gift, but he was still considered pro-Western. Barely a year after the fracking demonstrations, Ataka members again took to the streets, joining protests over high electricity prices. In March 2013, Mr. Borisov resigned.

A caretaker government was appointed, pending new elections, and Mr. Putin’s representatives quickly sought out the crucial figures involved in South Stream.

The Putin Steamroller

The meeting occurred after midnight at La Casa del Habano, a cigar bar in Sofia. Mr. Stoyanov, a New York-based corporate turnaround specialist who had returned to Bulgaria to serve as deputy energy minister in the interim government, had received several calls from an old acquaintance, insisting they meet for a drink.

But Mr. Stoyanov was surprised to find that his friend was not alone at the bar. With him was Aleksandr M. Babakov, a member of the Duma, the lower house of the Russian Parliament, whom Mr. Putin had appointed as a special envoy. (Mr. Babakov has been identified by the French news media as the middleman who arranged the Russian bank loan to the National Front in France.)

The purpose of the meeting soon became clear. “He wanted to take my temperature on the South Stream,” Mr. Stoyanov recalled in an interview.

Mr. Stoyanov said the project would not reduce Bulgaria’s dependence on Russian gas and would bring marginal economic benefit, but Mr. Babakov had not come to debate the merits.

“In not so many words, he said he would make me very comfortable if I would participate and help,” Mr. Stoyanov said, adding that he reported the encounter to Bulgarian intelligence. “I was not pleased by his presumption that I would just set aside and forget Bulgaria’s national interests.”

Mr. Babakov did not respond to requests for comment.

Mr. Stoyanov’s skepticism about South Stream mirrored that of officials in Brussels and Washington. European Union rules forbid the same company that produces gas to monopolize the pipeline that delivers it. Europe insisted that South Stream allow access to other gas producers in order to safeguard against overreliance on Russia.

At one European summit meeting several years ago, Mr. Putin and the European Commission president, José Manuel Barroso, argued over those rules, according to C. Boyden Gray, an American diplomat who in 2008 served as special envoy for Eurasian energy. Two officials in the room told Mr. Gray that the Russian leader exploded.

Mr. Barroso, whose term expired in October, said he did not recall the specifics of the exchange but confirmed that he and Mr. Putin had clashed.

“His point was always: ‘This is against us! This is against Gazprom! This is against Russia!’ ” Mr. Barroso recalled.

By the time Bulgaria held elections in May 2013, Mr. Putin was in a stronger position. He had proposed South Stream as an alternative to a Western-backed proposal for a pipeline, called Nabucco, from Azerbaijan to southern Europe. Nabucco would have reduced Europe’s dependence on Russian gas, as well as Mr. Putin’s influence. But the project had died by 2013 because of political and economic obstacles as well as interference from Mr. Putin. Now only South Stream was left standing.

Moreover, the Russians had already invested heavily in Bulgaria. VTB Capital, the investment wing of Russia’s second-largest state-owned bank, had opened a Sofia office, placing Bulgaria’s former finance minister, his deputy and the minister’s brother in major positions. VTB Capital, which declined to comment for this article, then partnered to buy stakes in a host of companies with Corporate Commercial, known as the favored bank of Bulgaria’s energy oligarchs. VTB even took a 9.9 percent stake in the bank itself.

The Bulgarian elections also seemed to work to Mr. Putin’s advantage. They produced an awkward coalition government between two pro-Russia parties — the Socialists and the Turkish minority party. And since together they could not achieve a parliamentary majority, they relied on Ataka to achieve a quorum. Mr. Siderov, Ataka’s leader, was nicknamed the Golden Finger because he tipped the balance.

The new prime minister was a technocrat, Plamen Oresharski, who found himself caught between this Moscow-leaning coalition and growing pressure from the European Union. Aleksei B. Miller, the man Mr. Putin had chosen to lead Gazprom, was sent in July to bring the Bulgarians into line. He promised to finance the €3.1 billion construction of the Bulgarian leg of the pipeline and agreed to sponsor Levski Sofia, the capital’s top professional soccer team.

But Europe was pushing Mr. Oresharski, too. The European Commission had begun an investigation into Bulgarian Energy Holdings, the state corporation that was to be Gazprom’s partner in South Stream.

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When Plamen Oresharski was Bulgaria’s prime minister, he had a secret meeting with Mr. Miller but will not discuss it.CreditStoyan Nenov/Reuters

Three months later, Mr. Miller returned to Sofia, this time in secret, for another session with Mr. Oresharski. It was supposed to last only 40 minutes, one official said. Months later, prodded about the lack of transparency, Mr. Oresharski angrily responded that the “only nontransparent thing with South Stream is my five-hour conversation with the boss of Gazprom, the contents of which will never be revealed.”

Mr. Oresharski did not respond to requests for an interview. But Russian interests clearly won out. The next day, Mr. Oresharski and Mr. Miller watched by video link as workers welded the first two joints of the pipeline’s Bulgarian leg.

A few months later, over the Christmas holidays and without public notice, the construction contracts were awarded: Bulgarian news outlets subsequently reported that the winners included companies with ties to a Bulgarian media mogul and member of Parliament, Delyan Peevski. In a statement, Mr. Peevski denied any ties to the project, calling the reports rumors “spread by the yellow press in Bulgaria.” The acknowledged Russian construction partner was Gennady N. Timchenko, one of Mr. Putin’s most powerful allies.

All seemed ready. The only obstacle was the European pipeline rules — unless they could be circumvented.

Pipeline That’s Not a Pipeline

On April 4, 2014, soon after Mr. Putin annexed Crimea, Bulgaria’s Parliament gave initial passage to a bill that effectively exempted South Stream from a number of European Union regulations, most important, the one that would have forced Gazprom to allow non-Russian gas to flow through the pipeline. Both parties in Mr. Oresharski’s coalition supported the legislation, as did Ataka and its leader, Mr. Siderov.

The bill accomplished this with a linguistic sleight of hand: The initial Bulgarian section of South Stream was not actually a pipeline, but rather a “gas-sea” interconnector. The European Union challenged the proposed change, while opposition members filed a freedom of information request for documents linked to the bill. A month later, they announced that the documents — which have been obtained by The New York Times — proved that Gazprom and the Kremlin were directly involved.

“This was a unique breach of national security,” Grozdan Karadzhov, a Reformist lawmaker, said in an interview. “It was also a unique amount of arrogance in how Russians see Bulgaria.”

The documents included passages of draft legislation suggested by a Gazprom subsidiary and forwarded to Bulgarian energy officials.

In an interview, the energy minister at the time, Dragomir Stoynev, called Gazprom’s suggestions a form of lobbying, insisting that “nobody dictated the terms; these were all our suggested changes.”

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Welders symbolically began Bulgaria’s section of the South Stream pipeline in 2013. Work was later halted.CreditBulphoto, via Agence France-Presse — Getty Images

But in a letter dated June 6, 2014, Mr. Stoynev acknowledged a direct Russian hand. In it, he updated his Russian counterpart, Mr. Putin’s energy minister, on where things stood. The “law amendments proposed by the Russia side” were discussed in detail, he wrote, and a number of them were approved by Parliament.

It was audacious, but it would not be enough. The bill would never be brought up for a second, final vote, largely because of the escalating conflict between Russia and Ukraine. In early June, the European Commission told Bulgaria to stop work on South Stream, saying it was investigating whether the pipeline construction contracts violated European competitive-bidding rules. When the Bulgarian government refused, the European Union cut off tens of millions of euros in regional development funds.

By this point, Ukrainian government forces were battling pro-Russian separatists in the east, and in the West there was talk of a new Cold War. On June 6, the American ambassador, Marcie B. Ries, warned Bulgarian companies against doing business with companies linked to Mr. Timchenko, who is on American sanctions lists. On June 8, a congressional delegation led by Senator John McCain, Republican of Arizona, met privately with Mr. Oresharski.

In desperate need of the European funds, the prime minister announced the next day that South Stream would be halted until it had full European Union approval.

At almost exactly the same moment, an unexpected panic swept through bank depositors in Sofia; a mysterious bank run had started at Corporate Commercial, the bank that had partnered with the Russian investment firm VTB Capital, and the financial institution of the state holding company overseeing Bulgarian involvement in South Stream.

Some speculated that VTB Capital, with its nearly 10 percent stake, would join other shareholders in riding to the bank’s rescue. But after Mr. Oresharski’s decision to halt the Bulgarian leg of South Stream, the Russian bank declined to participate in a bailout. Corporate Commercial collapsed, and in the ensuing crisis so did Mr. Oresharski’s government.

The final, unexpected development came on Dec. 1 when Mr. Putin, on a state visit to Turkey, announced that South Stream was dead. He blamed Europe and, according to press reports in Turkey, said he was “fed up with Bulgarians.”

Since then, Chancellor Angela Merkel of Germany, Europe’s most powerful leader, has suggested that South Stream might yet be built. After meeting with her, the new Bulgarian prime minister said he was confident European Union objections could be overcome.

Even if they are not, some diplomats contend that Mr. Putin achieved many of his goals.

While “he overreached, and he underestimated the response” to his intervention in Ukraine, said Mr. Gray, the former American diplomat, the Russian leader has been “quite effective” in countries like Bulgaria.

“He won a great deal by getting Nabucco stopped,” Mr. Gray said. “Ultimately, his goal is to keep as much control over the former parts of the Soviet empire as possible.”

Correction:

An article on Wednesday about tactics used by President Vladimir V. Putin of Russia to win Bulgarian approval for a natural gas pipeline under the Black Sea misidentified the professional Bulgarian soccer team that Gazprom, Russia’s state-owned energy giant, agreed to sponsor to sweeten the deal. The team is Levski Sofia, not CSKA Sofia. (While the Bulgarian prime minister originally said Gazprom would sponsor CSKA Sofia, the company later changed its mind.)

Jim Yardley reported from Sofia, and Jo Becker from Budapest and New York. Georgi Kantchev contributed reporting from Sofia, and Masha Goncharova from New York.

Putin’s Way: Articles in this series are examining how
President Vladimir V. Putin’s system of
personalized state-sponsored capitalism
allows him to wield power at home and
abroad.

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